Higher education is one of the biggest investments of your life, and graduate student debt can last for decades. Many graduates leave school with more than $70,000 in debt, according to the most recent data from the National Center for Education Statistics, so creating a plan to pay off that much is essential. There are numerous ways to go about this, from switching to another payment plan to finding employee assistance programs.
The best ways to pay off graduate school loans
There is no one-size-fits-all solution to repaying graduate or student loans – the right strategy depends on the loan type and your finances. However, the following strategies are worth considering when you begin to pay off your student debt.
1. Find another payment plan
If you take out federal student loans, you'll automatically be placed in the standard repayment plan, which lasts 10 years. However, you are not bound by this plan. Income-based payment plans are an option; these plans limit payments to a percentage of your discretionary income, usually 10-20%, which you pay out over 20-25 years before the remaining balance is canceled. With private loans, you can get a longer term by refinancing your loans.
Since student loans don't have prepayment penalties, you can also take the opposite approach and choose to pay off your loans in a shorter time frame by doubling your installments.
It's not just about sticking to your budget; it's about choosing the right plan that results in the best long-term savings. You can decide to refinance in five years and pay off your loans in five years. While it might work with your budget, it might prohibit other things like vacationing, buying a house, or starting a family.
Pros: You can customize your payment terms to suit your budget and, in some cases, have part of your balance canceled.
Cons: Longer payment plans charge you a lot more interest and keep you in debt longer, while shorter payment plans increase your monthly payment.
Ideal for: Graduates with average-to-low incomes.
2. Think about refinancing to a lower interest rate
If you took out student loans when interest rates were high, refinancing at a lower interest rate can help you save money and pay off your loans faster because more of your payment is allocated to the principal.
You can refinance federal and private student loans. But since you can only refinance through private lenders, think twice about refinancing your federal student loans; by doing so, you will lose access to income-based payment plans, loan forgiveness options, and various deferment and forbearance programs.
If you refinance your student loans, comparing lenders' rates is important before applying. Your credit score and finances determine the rate you receive, and each lender assesses these factors differently. If unsure where to start, you can check multiple rates from different lenders by filling out a single form on a loan comparison site.
Pros: Refinancing your loan can save you thousands of dollars in interest and lower your monthly payment.
Cons: Refinancing federal loans eliminates federal benefits, and interest rates and terms are based on your credit score.
Ideal for: People with excellent credit scores and a stable source of income who have private student loans.
3. Figure out ways to earn more
Side jobs are increasingly common, especially among the younger generation. A survey found that about a third of American workers have a second job outside their main job and use the money for various purposes, such as spending, paying regular expenses, or saving.
For someone with a large balance of college loan debt, getting a side job can be a great way to get out of that debt faster. Even if you earn an extra $100 per month and apply it to your student loan, you are reducing your balance by $1,200 per year.
Pros: Working on the side, doing something you love, can help pay off your student loan balance over time.
Cons: The hustle and bustle of regular work can easily lead to burnout, and it can be difficult to start a project.
Best For: People willing to be flexible and work overtime to earn extra money.
4. Apply for state assistance
Many states offer some form of student loan assistance. These programs are often used as incentives to retain or attract talent in certain areas of activity.
For example, Kansas offers five-year student loan forgiveness of up to $15,000 for residents living in "rural opportunity areas"; California offers loan forgiveness to doctors, medical professionals, and dentists.
Benefits: Thousands of dollars of assistance are available for the loan balance.
Cons: Some state assistance programs require you to live in a certain part of the state or have a certain occupation. Also, these programs are not intended to completely cancel your loans.
Ideal for: Those looking to relocate and settle into residence or provide professional services for an ongoing period.
5. Look for Employee Assistance Programs
Some companies offer to help their employees pay for their education costs as part of their benefits package. This could be a tuition refund or a student loan payment allowance.
However, many companies set an annual cap of $5,250, as this is the maximum tax-deductible contribution for both employer and employee. In addition, certain conditions may be attached, such as staying with the company for a certain period and meeting certain performance parameters. However, it's a great option to pay off your student debt faster without spending much money.
Pros: You can pay off your debt faster without investing anything out of pocket.
Cons: Many companies contribute as little as $5,250 per year, and you have to commit to staying with the employer for a certain period.
Ideal for: Private and federal student loan graduates who plan to stay with their employer for the next five years.
6. Learn to budget
Your income and expenses will change over time, but creating a basic budget is key to learning how to manage your money. Student loans occupy a relatively fixed place in your budget, so look at your other expenses to see where you can cut back.
Start by jotting down your expenses in a notebook or spreadsheet. You can also use a budget app if you don't want to calculate the numbers yourself.
Once you see everything in one place, it will be easier to figure out what your discretionary spending should be after accounting for your fixed expenses. You can also keep in mind the 50/30/20 rule, which states that 50% of your take-home pay is spent on needs (housing, food, utilities, loan repayments), 30% on wants (leisure, holidays, gym, subscriptions), and 20% are intended for savings (relief funds, investments).
Experts recommend keeping transportation and accommodation costs as low as possible, as they will take up most of your budget. If you want extra money to pay off your loans, be careful when spending on cars and houses. For example, you might buy a used car instead of a new one, move to a less expensive part of town, or live with roommates.
Benefits: Creating a budget gives you a clearer picture of where your money is going each month and helps you find ways to allocate extra money to your student loans.
Cons: It can take time to figure out exactly where to allocate the funds, especially if you haven't negotiated a budget.
Ideal for: Anyone who wants to monitor and manage their cash flow.
Bottom Line
It's easy to get overwhelmed by graduate student loans, but there are plenty of strategies to start paying them back. You can also combine methods to get the most out of your payments. Before you start paying, review your finances and talk to an expert to help work out the numbers based on current and future interest rates and payment terms.
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